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Hypothetical TAX question


Togo
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can someone explain this to me??????

i was messing around with the "net pay effects" calculator for my 401K and i see the following

pre tax savings rate (we all know what this is)

weekly pre-tax contribution (again, pretty self explanatory)

weekly take home reduced by (ditto)

estimated annual savings in federal taxes (WTF does this mean?)

can someone put an estimated federal tax savings to numbers for me? i just don't get it

am i really saving anything? am i actually getting a percentage of that "estimated tax savings" back as a refund? (i know i'm not getting all of it back - or am i?)

does this actually mean something? or is it just hype?

i would think that it would gain me a higher refund - but doesn't my weekly federal tax deduction change based on a percentage of my income already?

am i making any sense at all????? :leaving

*i am in no way looking for tax advice - just want clarification

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Guest Kens06
can someone explain this to me??????

i was messing around with the "net pay effects" calculator for my 401K and i see the following

pre tax savings rate (we all know what this is)

weekly pre-tax contribution (again, pretty self explanatory)

weekly take home reduced by (ditto)

estimated annual savings in federal taxes (WTF does this mean?)

am i making any sense at all????? :leaving

Kinda easy Chris,

Even I can get the drift!!

401K contributions are pre-tax$$

Say you gross $800 a week, your federal tax payment for that week is a part of your NET paycheck amount.

If you contribute $50 a week to the 401 account.

You federal deduction for that week is based on 800-50 or $750.

The dollars you save by contributing are seen in your weekly check, not the end of the year refund!

The calculator multiplies the weekly amount by 52 and estimates the extra $$ in your pocket over a year.

I think that is what you are asking?

Ken

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I hate to see you take a drug test Moe...geeze...

Say this year you earn 60k,you're single, and take a standard deduction. Using 2006 data, the amount Uncle taxes you on (called taxable income) is 51,550 (60000-3300 for 1 personal exemption, 5150 for the standard deduction). Your federal tax liability (the amount you're suppose to pay Uncle throughout the year) is roughly $9450. These contributions are called Federal Withholdings on your paystub. Withhold too much, you get a refund (like most Americans). Don't withhold enough, and you pay the balance on April 15th.

Now say you max out your 401K contri's this year, which is 15,500. Your taxable wages for the year becomes 44,500 instead of the 60K. Now take away the 3300 for your personal exemption and 5150 for your standard deduction. Your federal taxable income becomes $36,050, which has a tax liability of $5560.

That means you "stiff" Uncle $3890 (9450-5560) by sheltering your money in your tax deferred 401k plan. That's the estimated annual savings in federal taxes you were looking for.

Always try to max out your 401K contributions. Just ask yourself, would you rather pay Uncle for his BS War? Or pay yourself for your retirement (aka Corvette Mod Relief Fund)??

Make sense?

Dan C.

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Guest Sidewinder

Kinda easy Chris,

Even I can get the drift!!

401K contributions are pre-tax$$

Say you gross $800 a week, your federal tax payment for that week is a part of your NET paycheck amount.

If you contribute $50 a week to the 401 account.

You federal deduction for that week is based on 800-50 or $750.

The dollars you save by contributing are seen in your weekly check, not the end of the year refund!

The calculator multiplies the weekly amount by 52 and estimates the extra $$ in your pocket over a year.

I think that is what you are asking?

Ken

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Marana Rich

But, that money put away in your 401K is taxable when you withdraw it. Hopefully you will be older and wiser and at a reduced income, so your tax bracket will be lower. And severe penalties for withdrawing before hitting the golden age of 60....or is it 59 1/2?

Rich

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But, that money put away in your 401K is taxable when you withdraw it. Hopefully you will be older and wiser and at a reduced income, so your tax bracket will be lower. And severe penalties for withdrawing before hitting the golden age of 60....or is it 59 1/2?

Rich

I hear they're trying to push it to 65. Is that true?

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Marana Rich

But, that money put away in your 401K is taxable when you withdraw it. Hopefully you will be older and wiser and at a reduced income, so your tax bracket will be lower. And severe penalties for withdrawing before hitting the golden age of 59 1/2.

Rich

I hear they're trying to push it to 65. Is that true?

Can't find anything that mentions it. Correct age is 59 1/2. And when you withdraw your money there would be an immediate witholding of 20%. Early withdrawal incurs 10% penalty on top of that.

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thanks for the clarification guys!

i'd love to max out my 401K - but my income level vs. my "outcome" level doesn't suport it

and now that we are starting to shop for houses, it might get worse! :leaving

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Marana Rich

A last thought about 401K. If your employer is matching whatever you deposit, usually up to 4 or 5%, you are passing up some free money by not participating. Uncle Sam matches the first 5%, so if I max out at 15%, reality is 20% is actually going into the program....5% over 20-30 years is a lot of free money..

Rich

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